Gold prices continue to hit record highs as investors embrace themselves for a first interest rate cut from the Fed that could happen in June. The Fed Chairman, Jerome Powell, delivered some sharp language over the past two days in his testimony to the House and the Senate. The gold price reached a high of 2,170 today, and it is up more than 4.1% only this week. In today’s data, the US NFP is going to dictate the further path of the gold price, as this number is closely watched by the Fed, whose mandate is to keep the employment market healthy. However, traders are not that focused on today’s US NFP data as their eyes are on something else that is far more important, as the Fed chairman said in his testimony over the past two days.
Background
Gold prices have been on the move for the past three weeks, and the shining metal is well on track to record the biggest weekly gains since December. The price for the shinning metal has been rising for the past 8 days without recording any losing days, which has made traders a bit nervous as this is the biggest winning streak in several quarters. Many are anticipating that this is a good time for them to take some profit off the table, and they should avail themselves of the opportunity while the price is still near its record high. However, others do believe that there is still more room and juice left in this rally, and this should wait a bit.
The reason that we have seen so much rise in the gold price is mainly because of the hopes around the Fed’s monetary policy, where many expect the Fed to begin the process of cutting interest rates as soon as June. Although there have been some hopes that the Fed may actually cut the interest rate before June, those hopes have been quashed.
Jerome’s Sharp Language
Jerome Powell, the Fed Chairman, who delivered his testimony to the House and to the Senate over the past two days, indicated that the Fed now has to rethink its target of inflation. As per his comments, COVID has changed things, and the Fed has to think differently to adjust their inflation target. In simple words, his remarks were an indication that the Fed’s inflation target, which currently sits at 2%, is going to change soon, as it is not likely for them to achieve that. This means that the days of inflation are touching or flirting with the early levels of 2%. This means that although the Fed may actually only begin the process of cutting the interest rates in June, if they adjust their inflation target to a higher level, they are actually shifting the ground level, which would enable them to move much faster to move the interest rates to their normal level, which is currently ultra high.
This matters a lot for the gold price because if the Fed changes its target for inflation, then it means that they are cutting the interest rates as the actual inflation number will come closer to their original target, and this would trigger weakness in the dollar index, which directly and positively influences the price of gold.
